PGE suitor's intentions: big profits -Texas Pacific Group releases secret documents
Below is the Oregonian Article on Secret Texas Pacific Group (TPG) Documents that explain why the big push to destroy the Public Utility District Campaign and what exactly this corporation intends to gain from swinging this deal and buying PGE. It's incredible that anyone believed the Enron lies. Enron execs/stockholders also stand to benefit from the sale. Only the ratepayers will get screwed...
PGE suitor's intentions: big profits
Defending its bid for the utility, Texas Pacific Group releases secret documents explaining how it would benefit from the deal
Sunday, January 09, 2005
JEFF MANNING and GAIL KINSEY HILL
Texas Pacific Group on Saturday released the material it had submitted in secret to Oregon regulators and it made explicit what has long been understood: The company expects to earn a handsome profit from its purchase of Portland General Electric.
Senior company officials said in interviews that the deal has proved far more politically contentious than they had anticipated. But the documents make clear why the Texas investment firm is nonetheless pushing to persuade the Oregon Public Utility Commission to approve the sale.
One internal analysis deemed reasonable by senior company officials predicted Texas Pacific and its co-investors could earn more than $800 million in five years, a 20 percent rate of return on their initial investment.
Kelvin Davis, a Texas Pacific partner, said the company decided to release the confidential documents to dispel accusations that it had misled the public about its intentions. The documents, which were drawn up by the firm's number crunchers and consultants before the company made its bid, are forecasts of how the investment might perform under different scenarios, from job cuts to droughts.
"We've got nothing to hide," Davis said.
Texas Pacific made the documents available to The Oregonian on Saturday in response to a request from the newspaper. Davis said the firm did so primarily to protect the firm's integrity and in part because some of the material had already been made public.
Texas Pacific said it planned to make the documents available to the public Monday.
The release of the records, which comes after complaints from customer groups who claim Texas Pacific was misleading the public about its plans, is likely to raise pressure on Oregon regulators. The PUC is expected to decide whether to approve the sale within four to six weeks.
The highly unusual disclosure of the firm's financial analysis, which shows that the firm aims for such a large profit, could embolden critics who want the PUC to approve large credits for PGE ratepayers.
Customers question how it is in the best interest of Oregonians to sell off the state's largest utility to another Texas company that could earn $800 million by reselling the utility.
"Why shouldn't the customers get to participate in some of that windfall?" said Ken Canon, executive director of the Industrial Customers of Northwest Utilities.
A broad group of consumer advocates, business groups and public officials has called on state regulators to reject the Texas Pacific proposal.
The PUC staff has recommended $75 million in rate credits over five years, and Texas Pacific has agreed to $43 million. Davis said Saturday that the firm remains committed to its planned purchase of PGE but is unwilling to close the deal with the long list of conditions the PUC staff is recommending.
Among other things, the documents released Saturday show:
The investment could generate $250 million to $1 billion-plus in profits to Texas Pacific and investors.
Cost cuts are a likely, though not definite, part of Texas Pacific's overhaul of PGE.
Texas Pacific says it will sell PGE when the price is right, whether that's three years or seven or, at the most, 12.
Investors claim they will sell the company through a public stock offering rather than to another energy company, though the documents indicate a sale to another company would likely fetch the highest price.
Difficult spot for firm
Sixteen months after Texas Pacific went public with its intentions to buy PGE, the wealthy, successful buyout firm finds itself in a classic conundrum: The hefty profit potential of PGE, the very thing that makes it so attractive, is precisely what makes it a difficult political sale.
Although Texas Pacific and its backers characterize their offer as an opportunity to rescue PGE from the clutches of the Enron bankruptcy, critics view Texas Pacific as just another profiteer from the Lone Star State.
Texas Pacific's challenge is to prove to regulators that the deal is a good one for PGE's 755,000 customers despite big returns for investors. Some of the documents released Saturday were made public in a Willamette Week story last week that highlighted layoffs and cost-cutting measures.
Texas Pacific's pursuit of PGE began in the fall of 2002 when Davis met with PGE Chief Executive Peggy Fowler in Portland. "At that first meeting, I didn't know anything about PGE," said Davis, who was to become the point man on the deal. As the months progressed, Texas Pacific's interest grew, fed by a possible linkup with local utility Northwest Natural Gas.
One of the earliest of those documents was a Texas Pacific memo dated April 21, 2003, that described the firm's initial impressions: "With pressure growing on Enron to conclude a sale of PGE, this situation -- a highly motivated seller, an industry in the midst of a massive restructuring, bankruptcy complexity and significant litigation liabilities -- strikes us as one that TPG may be uniquely in position to address. . . . Even in a very harsh downside case our capital would be preserved."
The analysis continued over the summer. PGE offered hefty profit potential in part because it had been so badly beaten up by the energy crisis of 2000-01, Oregon's recession and Enron's collapse.
"Intuitively, we strongly believe that during our ownership (of PGE) we will see: i) The Oregon economy will come back and the load growth (electricity demand) will come back with it, ii) we will successfully reduce some costs, iii) we will whittle down the liabilities and clean up the overhang depressing this company (including the removal of its Enron taint), and iv) we will sell the company to a strategic buyer."
48 different profit scenarios
Texas Pacific continued to fine-tune its expectations. A key Sept. 15, 2003, analysis pegged likely profits as ranging from $251 million to just over $1 billion on an original $525 million investment. Texas Pacific intends to borrow more than $700 million and assume $1.1 billion in debt, bringing the total PGE price tag to $2.35 billion.
The analysis cited four out of 48 different profit scenarios, which predicted annualized returns ranging from 8 percent to 24 percent. Under the most likely scenario, TPG expects a 20 percent annualized return, or $800 million.
Most of that gain would be realized in the eventual sale of the company.
Two consulting firms hired to study the potential at PGE focused heavily on cost-cutting, saying the cuts could save $30 million to $50 million a year.
"Savings generally result from reduction of staffing level in certain areas, especially customer service, HR (human resources) and IT (information technology)," said a Aug. 25, 2003, report. "Reductions generally do not target areas where union work force is employed."
The consultants also reported separately that PGE's corporate staff was "top heavy and misaligned."
No specific plans for cuts
An Aug. 28, 2003, "preliminary quantification of potential savings" listed a potential head count reduction of 255 from a total of 2,630.
Despite the repeated references to cuts in both operating and capital expenses in the documents, Davis insisted that Texas Pacific had no specific cost-cutting plans. He said the reports were conducted before Texas Pacific knew much of anything about the particulars of PGE.
Davis would say only that Texas Pacific will attempt to make PGE more efficient. Cost-cutting could be a major part of that drive.
Over time, Texas Pacific's plans for PGE include overall increases in spending, both in operations, maintenance and capital spending, Davis said, including a nearly $300 million investment in a new gas-fired power plant.
"The greatest lever to reducing rates is, of course, reducing costs," Davis said. "We don't think there is anything sinister or wrong about that. That's how the utility business works."
Under all the scenarios included in Texas Pacific's financial models, the investment firm would hold PGE for five years. That has fueled fears that Texas Pacific intends to quickly resell the company.
Davis said Saturday that the five years used in the financial models doesn't reflect Texas Pacific's actual plans. "It means absolutely nothing about what our expected holding period is," he said.
Davis said it is likely his firm will own PGE longer than five years, but he refused to specify.
Those early consultants' reports said the best, most profitable way to dispose of PGE would be a sale to another energy company. The consultants listed Scottish Power, owner of PacifiCorp; Northwest Natural; Avista of Spokane; and Puget Energy in Bellevue, Wash., as possible PGE buyers.
Texas Pacific has since concluded that staging an initial public stock offering, in effect selling the company to shareholders, is a more likely outcome, Davis said, in part because a new buyer would face the same bruising experience of obtaining approval from Oregon regulators.
The Oregon PUC, which has been reviewing Texas Pacific's bid for more than 10 months, would have to approve a sale to another utility. The PUC would have no say over a stock offering if no single new shareholder bought more than 5 percent of PGE.
An IPO could return PGE to its former status as an independent, locally based company.
Some critics contend that the confidential documents are evidence that Texas Pacific secretly intended to slash PGE costs, all the while assuring regulators and consumer groups it had no specific operating plan in the works.
Jason Eisdorfer, a lawyer for the Citizens Utility Board, dismissed Texas Pacific's release of the documents as posturing. "When the cameras are rolling and the lights are on, these guys tell you what you want to hear," Eisdorfer said. "Their deal is antithetical to the regulatory process. These guys are speculators."
For his part, Davis is unapologetic about the considerable profit his firm stands to make. Though PGE is low-risk, it's still a risk to pour hundreds of millions of dollars into the deal.
"We never expected this process would become as politicized as it's been," Davis said.
Texas Pacific's financial gains won't necessarily come at the expense of PGE customers, he added.
Lee Beyer, the PUC chairman, said late last week that the confidential documents weren't necessarily at odds with Texas Pacific's public testimony and reflected normal practice for an acquisition.
"I've seen nothing to suggest they were lying or trying to mislead," Beyer said.
Nevertheless, Beyer, when contacted Saturday, said the contents of the documents "raise issues for the commission to consider."
Mike Rogoway of The Oregonian staff contributed to this report. Jeff Manning: 503.294.7606; firstname.lastname@example.org. Gail Kinsey Hill: 503-221-8590; email@example.com
Copyright 2005 Oregon Live. All Rights Reserved.
add a comment on this article